A break, not a reprieve

The eurozone crisis has brought out the worst in European decision-making.

The decisive German vote in favour of expanding the European financial bailout fund has the global economy relieved. But it is still many steps from being relaxed. In a repeat of what continues to make a final resolution of the present European debt crisis elusive, German Chancellor Angela Merkel took a position between what the markets wanted and what her public was willing to do. The former had hoped for the European Financial Stability Facility (EFSF) to be expanded to at least two trillion euros. This would mean enough money to cover a worst-case scenario: a Greek sovereign default followed by domino effects in exposed European banks and countries like Portugal or Spain. But this was too much for Ms Merkel's coalition who insisted on capping the fund at about ¤600 billion. Enough to handle a default and a bit more.

The market response has been tepid. The euro fell soon after the German vote. The first tranche of EFSF bonds have been treated as risk-tainted. Worse is the sense that Europe has once again kicked the can down the road rather than addressing the core problems once and for all. The German vote means the can has been kicked far down the road, but it's still on the road rather than on a safe shelf. The core problem remains that no one can see how Greece can't avoid default given the size of its debts. A carefully managed default is being negotiated. But the losses will have to absorbed somewhere and in a manner that financial panic doesn't ensue. This was what a two trillion EFSF was supposed to have addressed. Today, the facility can handle a small crisis but not a big one. The Eurozone crisis seems so distant from places like India that only senior policymakers are paying attention. Yet Europe's fumblings are the most important issue in international affairs today. The European Union, for example, is India's largest export market and one of its largest sources of foreign investment. Already, the rupee has plunged. A Europe in a shock recession would have a huge spillover impact on the rest of the world. India could well expect a few percentage points being knocked off its already descending growth figures.

Unfortunately the unity that was evident at the international level after the subprime financial crisis is lacking now. Europe receives plenty of advice but is expected to handle its present crisis alone. If anything, most countries are trying to isolate Europe from their own financial systems. India showed this "it's every man for himself" attitude during the recent emerging economies summit. The euro crisis has shown the worst of European decision-making - and a less than nice face about the present global political economy as well.